A person found to be a Shadow director or officer of a
company may be liable for breach of director's/officer's
duties including trading whilst insolvent by a court, despite not
being recorded on the ASIC register or being formally appointed to
the position of Shadow Director .
In brief: A person found to be a Shadow
director or officer of a company may be liable for breach of
director's/officer's duties including trading whilst
insolvent by a court, despite not being recorded on the ASIC
register or being formally appointed to the position of Shadow
Who needs to read this article
CFO and other executives who report to and advise the
All those involved in the management of a company regardless of
whether or not they are registered or validly appointed as a
What you need to know
Who may be a Shadow/De-facto
A person who acts in the position of a director even though
they have not been formally appointed as a director (commonly known
as de-facto directors); or a person or corporation upon whose
wishes the directors of a company are accustomed to act in
accordance with (commonly known as a Shadow Director).
Individuals as well as companies may be 'shadow
directors' (e.g. a parent company may be deemed a Shadow
Director of its subsidiary).
The Courts don't really differentiate between Shadow
Directors and De-facto Directors anymore and have said that the
terms are interchangeable.
Who is not a Shadow Director?
It is unlikely that a professional advisor will be considered
to be a Shadow/De-facto Director unless they are doing something
more than passively providing professional advice.
A third party insisting on particular commercial terms will not
be a Shadow Director provided the Company Directors still exercise
their own judgment as to whether or not to accept the terms. The
same would apply in respect of a lender.
What are the consequences of being a Shadow
In addition to any liability as an officer of a company, a
Shadow or/De-facto Director may also be liable for trading whilst
insolvent pursuant to s 588G of the Corporations Act 2001
Who may be Shadow Officer?
A person who makes, or participates in making, a decision that
may affect the whole, or a substantial part, of the business of a
corporation, or who has the capacity to affect significantly the
corporation's financial standing. This may include:
A company secretary
An advisor/consultant upon whose instructions or wishes the
board is accustomed to act (eg an accountant)
A CFO or Chairman
Who is not a Shadow Officer?
A manager who only reports to the board and has no influence
over board decisions or the company's financial standing.
What are the consequences?
An officer of a company, including a Shadow Officer, owes duties
to the company for which he or she works. These duties are set out
in s 180-183 of the Corporations Act 2001 (Cth). A breach
of those duties may result in personal liability for that breach
and depending on the breach, may result in a claim of
The Courts are at pains to state that in determining whether a
person or corporation will be deemed a Shadow Director or officer,
all facts need to be taken into consideration and as such, the
determination is very much on a case-by-case basis.
Having said that, the following should be considered:
Make sure that the board ultimately makes their own decision
and doesn't just blindly rely on the recommendations of
in-house counsel or other professional advisors.
Be careful when directing subsidiaries – you can
recommend, but ultimately the decision needs to be made
independently by the company's director/s.
In-house counsel should provide advice, rather than direct the
affairs of the company.
Ideally, in-house counsel should not be a member of the board,
as this blurs the lines between being an advisor and
Set clear guidelines and parameters for management and in-house
counsel so it is clear where their influence ceases and where the
control is solely in the hands of the board.
If you are involved in the management of a company you need to
be aware of your responsibilities and the consequential liabilities
you may face. It should be noted that some insurance policies will
not cover professional advisors for any liability incurred as a
result of being found to be a shadow director or officer. Likewise,
Directors and Officers insurance does not usually extend to shadow
directors or officers. Ignorance is not an excuse: understanding
your position within a company could save you from financial and
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.Madgwicks is a member
of Meritas, one of the world's largest law firm
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